20 April 2022, NIICE Commentary 7829
Soumya Awasthi
After a state of emergency was declared in Sri Lanka, the United Nations Human Rights Office (OHCHR) intervened, urging the Sri Lankan authorities to defuse the public demonstrations. They were concerned about militarization, given the institutional failure. It has been more than a month since the citizens of Sri Lanka have been living in a hand to mouth situation owing to the crippled economy of the nation. Under Mahinda Rajapaksa’s presidency in 2005, the government aspiried to turn itself into another Singapore by constructing state of the art infrastructure and ports. However, instead, Sri Lanka foreign exchange reserves has dropped to USD 2.8 billion.
The 2C’s- China and COVID-19- have worked as a double agent for the economic downturn of Colombo, sinking them into the abyss. One of the reasons for the economic crunch is the hard-hit tourism industry due to the COVID-19 pandemic. But the second and rather vital reason is China and its concessional and hidden loans. Beijing is often accused of arresting a nation in its economic trap by offering a large loan. If they fail to repay, it allows China to control them through asset seizure-like in the case of Hambantota port. Once again, Sri Lanka is hard-pressed for loan repayment of USD 45 billion, out of which total debt to China stands at USD 8 billion, almost one-sixth of Sri Lanka’s total external debt accounting for 10 percent of the debt. Meanwhile, China has refused to offer any concessions in debt repayment.
The September 2021 report by AidData titled “Banking on the Belt and Road” provides a list of country-specific hidden debts and unreported debts to China. It is reported that “Low-income and Middle-income countries (LMICs) governments are underreporting their true levels of Chinese debt exposure to the DRS by USD 385 billion. That’s slightly more than 50 percent of all official sector lending from China to state-owned entities in LMICs”.
Although Sri Lanka’s debt to China may be rounding off to only 10 percent of the total loan, it is the unreported loan, over the top loan for repayment of the existing loan cycle, and the mortgage clauses that work like a termite in the Sri Lankan economy. However, the Chinese media is reporting how the Xi Jinping government is shedding away any role in the current situation in Sri Lanka. It has conveniently blamed it all on the West and Sri Lanka itself, as to how weak economic foundation, lack of self-sustaining economy, excessive borrowing habit, and poor planning have dug a pit for Rajapaksa. And that Sri Lanka, as a responsible sovereign nation, “borrowed money from China.”
Another way in which China has shed its responsibility is by dragging the United States into the debate, arguing that it’s Srilanka’s over-dependence on the US Dollar. In a way, China has seeded a thought that Sri Lanka should consider diversifying its foreign exchange currency and accept Chinese Yuan as a mode of payment. It is important to note here that China has been trying to lobby for the Chinese Yuan as an international currency for many years. During the Winter Olympics 2022, the international players were offered to use Digital Yuan in currency exchange. One of the prime objectives of the Chinese Foreign policy is to make the digital Yuan a currency for international trade settlement as a part of the risk management exercise.
In this matter, China’s white papers reveal the Chinese government’s narrative which reflects its policy of propaganda, and rhetoric. The concessional loans under soft power diplomacy sell infrastructure dreams and this has turned out to be detrimental to a developing economy. Another important factor to note here is that China’s economy is itself in a desperate situation wherein the Communist Party of China (CPC) is looking for public support which they fear losing due to the pandemic led crisis (logistics and economy). Its own economic slowdown due to COVID-19 has sent shock waves in the CPC office as the major companies began pulling out of China.
China has always kept its interests at the forefront and used the small nations as its pawn, be it Pakistan, Maldives, Bangladesh, Laos, or Tajikistan, who are reeling under Chinese debts. China is known for selling a dream of a fast-growing economy, and then the dragon engulfs them in his hunger for more. Countries need to remain vigilant and conscious of their status before committing to China. Sri Lanka’s debt GDP ratio increased from 94 percent to 119 percent as per International Monetary Fund (IMF) from 2019 to 2021. Similarly, the Chinese loan model makes a low income or troubled economy as their consumer, and if not repaid, then China owns a real estate in the form of equity. This slow and gradual damage to Colombo is a matter of grave concern, and other countries caught in this vicious cycle of loans must learn lessons from the Sri Lankan experience.
Soumya Awasthi is an Associate Fellow with Vivekananda International Foundation, India.
